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Apple (AAPL) stock has been treading water in the past two weeks since our last article at the end of March, “Apple Might Hike Its Dividend, But Investors May Want to Short Its Puts.” AAPL stock is trading at $164.16 in early trading on April 17, very close to the $164.90 price at the end of March. Earnings are due out on May 4 for the company's fiscal Q2 period ending March 31, so it makes sense to review the trades we discussed.
In this regard, short sellers have been making money selling out-of-the-money puts and calls ahead of the company's May 4 fiscal Q2 earnings ending March 31. In fact, the short option plays mentioned in my last article have already produced huge profits.
We discussed shorting the April 28 expiration $180 strike price calls. The option premium at the time was 25 cents, and today it is trading for just 5 cents, with 11 days left to expiration. In other words, investors have made 80% of the projected yield of 15 basis points (i.e., $0.25/$164.90). So investors have captured most of that income now and may want to roll the trade over.
The idea at the time was that this short play produced an additional 1.85% of annualized income (there were 27 days left to expiration) assuming it could be repeated each month. This is important since AAPL's 0.57% dividend yield (i.e., $0.94/$164.90) is not that high.
Moreover, as we pointed out Apple is likely to declare a hike in its dividend soon along with the fiscal Q2 earnings, as I pointed out in the April 2 article. Now it makes sense to look at shorting the May 5 call options on a covered call basis. That would entail buying back the April 28 calls at 5 cents and then, since the investor's covered call basis is available again, shorting the $180 calls for May 5.
Fortunately, those calls are now trading also at 25 cents. So the investor can now make an additional 15 basis points for these calls which expire in 18 days (i.e., $0.25/$164.16).
The $180 calls are 9.6% higher than today's spot price of $164.30, so there is the possibility of making almost a 10% unrealized capital gain, assuming AAPL stock rises to this strike price on or before May 5. In fact, some investors might want to take on additional risk and short the $177.50 strike price for 44 cents per covered call contract. That produces an immediate yield of 26.7 basis points, or about 3.2% annually if repeated each month for a year.
Keep in mind as well that the investor will have almost doubled up their income this month by having rolled over the original April 28 covered calls.
Shorting Puts in AAPL Stock Produces Even More Income
The short-put options play mentioned in the April 2 article have already produced huge profits. For example, we discussed selling short the April 28 expiration $147 strike price puts, almost 10% below the spot price. At the time the premium received was 70 cents, or 48 basis points for the month, equal to an annualized 5.71% yield. Today those puts are trading for just 8 cents per put option.
So investors have made almost 90% of the total yield projected at the time and it probably makes sense to roll this trade over. That means buying back the short put position at 8 cents and re-shorting a longer-dated expiration period put).
For example, the May 5 expiration period shows that the $147 strike price puts trade for 50 cents, again with a 10% downside protection from today's spot price. That is a little less than the previous trade, but still provides a 34 basis yield for the month and an annualized yield of 4.08%.
But keep in mind, just as with the short calls, that we have doubled up our short trades for the month. Therefore the total premium to the short-put investor could be as much as $1.12 (i.e., 62 cents from the rollover trade and 50 cents from this trade). That works out to a monthly yield of 68 basis points (i.e., $1.12/$164.30), or 8.2% on an annualized basis. That is significantly higher than the paltry yield that Apple stock presently has.
The bottom line here is that investors can make significant profits shorting out-of-the-money puts and calls ahead of the company's earnings release on May 4.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
